therefore, any such analysis is rather conventional. Nevertheless, these dynamics may indirectly indicate not only growing expansion of Russian companies abroad, but also the trend towards repatriation of previously exported capitals, which became noticeable in the 2000s. From the point of view of international expansion, This analysis, basing on the materials presented by the KPMG corporate finance department for mergers and takeovers (see “Analiz obschei situatsii na mirovom rynke sliyaniy i pogloscheniy,” 2004), was supplemented and adjusted by the author’s calculations in accordance with the data presented by Dealogic.
the bulk of Russian investment was traditionally directed to CIS member countries and countries of Central and East Europe (42 per cent and 21 per cent, respectively, of the total amount of external investment registered in 2002).
Completed transactions involving mergers and takeovers registered in Russia in 1999 through 2003* 1999 2000 2001 2002 Amoun Num- Amoun Num- Amoun Num- Amoun Num- Amoun Numt, US $ ber of t, US $ ber of t, US $ ber of t, US $ ber of t, US $ ber of mil. transac- mil. transac- mil. transac- mil. transac- mil. transactions tions tions tions tions Mergers and take- 1203,8 75 508,3 134 1899,3 199 2578,9 217 6668 overs in Russia Russian companies 167,2 33 2111,9 60 1318,6 43 1825,8 41 2455 taken over by foreign companies Foreign companies 6,9 11 105,7 17 463,6 25 504,4 33 975 taken over by Russian companies Total mergers and 1377,9 119 2725,9 211 3681,5 267 4909,1 291 10098 takeovers * Transactions completed by December 2, 2003, with the exception of privatization deals. As concerns 2003 – without the TNK – BP and YUKOS – Sibneft transactions. Taking into account the BP – TNK deal, the amount of transactions in 2003 should be adjusted by US $ 7.7 billion (or the amount of cash – US $ 2.6 billion). This methodology is the most proper and comprehensive as concerns the assessment of the dynamics on the market of mergers and takeovers. Other studies do not exclude privatization transactions and equity swaps in the course of evaluation of the amounts of the market (Thomson Financial). According to evaluations published by Ernst&Young (only cash money, including the TNK – BP and YUKOS – Sibneft transactions), the amount of deals made US $ billion in year 2000, US $ 5 billion in 2001, US $ 9 billion in 2002, US $ 12 billion in 2003 (first 9 months). After the exclusion of US $ 3 billion (the “contribution” of the canceled YUKOS – Sibneft transaction), the results registered in 2003 coincide with the data presented by Dealogic, although in preceding years the differences in evaluations were significant.
Source: Dealogic 2002-2003; KPMG As concerns the sectoral structure, the share of transactions involving enterprises engaged in extraction of oil, natural gas, and other mineral resources made 63 per cent of the total amount of merger and takeover transactions in 2003, although the world significance of the extracting sector is less than 5 per cent (see Table 2). Nevertheless, in absolute terms the amounts of transactions increased by 40 per cent as concerns the industrial production and by over 100 per cent in the sectors of telecommunications, transport, and public utilities. In Russia, the sectors of finances and insurance, real estate, chemistry and pharmaceuticals, which are highly developed on the world scale, retain a low attractiveness for investors. The share of merger and takeover transactions in these sectors in Russia makes about 3 per cent, while in the world at large this share constitutes about 42 per cent of the total amount of such deals. According to the RF Ministry of Antimonopoly Policy, in 2003 the most intensive activity was also observed in the block of industries related to the fuel and energy complex, transport, communications, and housing and public utilities, as well as on traditionally attractive markets of oil, oil products, and coal.
In 2003, the most noticeable transactions were the merger of assets owned by the TNK and BP, and the transaction between the Interros group and OMZ, as well as attempt of the Alpha group to establish its control over the Megaphone company. The merger (friendly takeover) of Sibneft and YUKOS announced to take place in 2003, could have been the largest deal in the history of the Russia’s economy, however the financial and economic analysis of a cancelled is not feasible. In February of 2004, the signing of the cancellation protocol, it seems, brought to the end the period of uncertainty as concerns the relations between the largest shareholders of these two companies. For the future, it may be of practical importance to analyze the “divorce” techniques applied to the in fact completed takeover.
As Table 3 demonstrates, in quantitative terms horizontal transaction continued to dominated in 2003. On the contrary, conglomerate mergers and takeovers made about 10 per cent to 15 per cent in the aggregate amount of respective deals and about 20 per cent to 25 per cent in the total number of transactions. Nevertheless, according to the data presented by the RF Ministry of Antimonopoly Policy, in the beginning of on the commodity markets on the largest scale occurred processes of creation of ramified structures and vertical integration, including the formation of large vertically integrated companies striving for control over enterprises ensuring the whole cycle of production, as well as the consequent sale of the products. These processes determine the growth in the aggregate economic concentration.
Sectoral structure of transactions involving mergers and takeovers registered in 1999 through 2003, %* Sectors Russia World 1999 2000 2001 2002 2003 Extracting sector 53 4 49 25 63 Industrial production 1 55 6 34 14 Telecommunications 2 14 9 7 11 Transport 0 0 4 1 4 Public utilities 27 1 0 3 2 Food and light industries, wood working 4 15 2 10 2 Finances and insurance 0 0 2 4 2 Chemistry and pharmaceutical industry 4 5 20 1 1 Mass media and program products 0 2 0 14 0 Other 9 5 8 1 2 TOTAL 100 100 100 100 100 * Transactions completed by December 2, 2003, without privatization deals. As concerns the data for 2003, there was excluded the YUKOS – Sibneft transaction.
Source: Dealogic 2002-2003; KPMG Table 3.
Mergers and takeovers as broken down by type in January through September of 2003, % Conglomerate Vertical Horizontal Share in the total 10-15 20-25 65-amount of transactions, without the oil sector Share in the total num- 20-25 25-30 50-ber of transactions Source: M&A Appraisal As concerns the assessment of the quantitative dynamics of mergers and takeovers in the environment existing in modern Russia notwithstanding the stages of economic growth, the most important factors to be taken into account remain such as post-privatization redistribution of property and expansion of large groups.
Nevertheless, the latter factor became less significant. The “contribution” of the largest groups in the intensification of processes of mergers and takeovers taking place in Russia in 2003 became more important not only due to the intensification of reorganization processes in the groups and enhancement of their expansion abroad. The major factor behind these developments is the more active behavior of economic agents of the second echelon, large and medium sized companies disposing of sufficient resources to expand their businesses at the expense of taking over smaller companies.
The general trends in the dynamics of mergers and takeovers are confirmed by the data on the dynamics of applications submitted to the RF Ministry of Antimonopoly Policy (see Table 4). In the last few years, there was observed a growth in the aggregate number of applications submitted in compliance with articles 17 and 18 of the RSFSR law No. 948-1 of March 22, 1991, “On competition and restriction of monopolistic activity on commodity markets.” It should be noted that the majority of applications are submitted in relation to article 18.
In 2002, the number of notifications submitted in accordance to article 18 (9461) was comparable with the number of applications relating to the same article (10198). At the same time, according to the data presented by the RF Ministry of Antimonopoly Policy, about half of transactions (in accordance with article 18) conducted in 2002 through 2003 were related to purchase of shares in the authorized capitals of economic agents operating on different commodity markets and therefore not competing with each other. Therefore, article is “tuned” to the excessive rigidity as concerns the necessity to comply with permission procedures. As a result, a considerable part of economic agents attempts to avoid the approval procedures required by articles 17 and 18 – the number of violations found out by the RF Ministry of Antimonopoly Policy made 4000 in 2000 and more than 5 thousand in 2001 (their actual number is much more considerable), and it should be noted that the increment in the number of violations of exactly these articles of the law “On competition…” was most significant15. At the same time, the problem of “bureaucratization of violations” (as defined by I.
Yuzhakov, the former MAP Minister, in the course of a press conference held on December 25, 2003), in the realm of antimonopoly legislation, i.e. the growing involvement of officials in anti-competition arrangements, is of equal importance.
Dynamics of the number of examined notifications and applications submitted in accordance with the stipulations of articles 17 and 18 of the law “On competition…” * Number of notifications and applications Specific weight in the number of applications submitted in accordance with articles 17 and 18, % Article 17 Article 18 Article 17 Article 1998 2485 4417 36,0 64,1999 2936 7315 28,6 71,2000 3882 12092 24,3 75,2001 4827 16165 23,0 77,2002 4371 19659 18,2 81,* The RSFSR law No. 948-1 of March 22, 1991, “On competition and restriction of monopolistic activity on commodity markets” established state control over the creation, reorganization, and liquidation of commercial organizations and associations thereof (article 17) and over the compliance with antimonopoly legislation in the course of purchase of shares in the authorized capital of commercial organizations (article 18).
Source: the data presented by the RF Ministry of Antimonopoly Policy In the case there is analyzed only the structure of applications (without notifications), the major trends retain their importance (see Table 5). In 2002 through 2003, in the structure of applications examined by the RF Ministry of Antimonopoly Policy more than 70 per cent constitute applications for purchase of shares (article 18), while the share of applications relating to mergers and affiliation does not exceed 5 per cent. It apparently does not mean that the data collected by the RF Ministry of Antimonopoly Policy contradict to the statistics of mergers and takeovers in Russia presented above. On the contrary, the MAP statistics, although not permitting to single out takeovers (this term is lacking in the Russian legislation), indicate growing scale of this process, especially taking into account the large amounts of respective blocks of shares (over 20 per cent).
Structure of applications examined by the RF Ministry of Antimonopoly Policy in 2002 through Types of applications 2002 Number Share, % Number Share, % Purchase of shares 7813 71,1 8880 71,Procurement of fixed means of 1901 17,3 2144 17,production or intangible assets Mergers and affiliations of com- 500 4,6 539 4,mercial organizations Other 763 7 951 7,Total 10 977 100 12 514 Source: the data presented by the RF Ministry of Antimonopoly Policy, authors’ calculations The problem is that the term “reorganization” defined in the RF Civil Code (article 57) relates only to the legal aspects of enterprises’ operations as concerns the regulation of possible intermediate transformations of legal entities between their creation and liquidation (although with respect to substantive aspects it includes the latter, since reorganization is also a way of both termination and creation of new legal entities). At the same time, the typical Russian practice is to register transactions, which in fact are mergers (affiliations), in accordance with the requirements pertaining not to “reorganization,” but to purchase of shares and assets.
Simachev Yu. O sovershenstvovanii antimonopolnogo regulirovaniya primenitelno k integratsionnym protsessam v promyshlennosti. Mimeo, 2003.
This situation results from, first, the wish of contracting parties to circumvent the procedures applicable to reorganization (the reorganization agreement, procedure of conversion, transfer deed, calling of the general meeting of shareholders, approval on the part of the RF Ministry of Antimonopoly Policy, etc.), and, second, to deprive the creditors of the right to request the fulfillment of obligations ahead of the schedule16. The latter norm seems to be excessive, however the fact that it is retained in the legislation is an important incentive to look for possible bypasses.
Yet another objective motive is to preserve the former company in the case it has the stock, credit, and “report” (especially answering international standards) history in the cases the merger requires to create a new company. As Table 5 demonstrates, the number of application for purchase of shares and assets almost 20 times exceeds the number of applications for merger and affiliation. It should be also noted that applications for reorganization (merger, affiliation, etc.) are most often submitted in the cases of enlargement of SUEs in the framework of the reform of this sector implemented over the few last years.
In 2003, there emerged a number of optimistic evaluations of the existing procedures governing mergers and takeovers, according to which “managers more and more often review the idea of merger with other enterprises as a type of business restructuring, a tool from the arsenal of instruments permitting to achieve the qualitative improvement of the business structure and a way to attract investment.”17 From our point of view, the realities are yet very far from such assessments. Although positive shifts take place, they are rather unique.